LONDON, (Reuters) – It all comes down to the data. Investors assess how severe U.S. rate increases are, whether inflation in the euro zone is at its peak and what impact China’s COVID lockdowns have on the No.2 economy.

Just as the markets are closing in on a chaotic May, U.S. payrolls could signal that June will be a calm month. 

We have a look at what the week holds from Kevin Buckland, Ira Iosebashvili, Sujata Rao and Tommy Wilkes in Tokyo.

1. STARTING TO BITE

The U.S. Jobs data Friday could reveal whether the cumulative 75 basis point Federal Reserve rate increases since March have been felt in a strong labour market.

Reuters analysts polled predicted 350,000 new jobs for May, compared to solid 428,000 for April.

Data showing weakening in housing areas is a sign of rising recession worries. Banks are warning of an increase in the likelihood of an economic recession.

However, any sign of softening in jobs markets may not slow the Fed’s determination to raise rates as high as necessary to combat inflation. Fed Chief Powell admits that this will cause “pain” In June and July, the markets anticipate 50-bps increases.

Graphic: US non-farm payrolls – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoxjrxvr/Pasted%20image%201653499227275.png

2/ ZERO COVID, ZERO GREEN    

    The cost of China’s zero-COVID lockdown strategy is clear, with Premier Li Keqiang decrying the economic damage done and pledging to salvage “reasonable” growth for this quarter.

    China has announced a broad package of economy-boosting policy steps, and Li promised detailed guidelines for their implementation soon.

    Yet many economists project a contraction this quarter after a raft of bleak data, including a soaring jobless rate. On Tuesday and Wednesday, the PMIs for the future will show how the factories are doing.

While Shanghai is aiming for an immediate exit from the crippling multi-week lockdown on June 1, Beijing tightens controls. Markets seem to be lacking confidence – this is evident in the CSI300 stock market index, which is down 20% and the yuan at its lowest level since 2020.

Graphic: China exports, credit & GDP – https://fingfx.thomsonreuters.com/gfx/mkt/12/6912/6843/Pasted%20Image.jpg

3/ A HEADACHE CALLED INFLATION

Inflation in the Eurozone is likely to have reached a new record of 7.6%, as opposed to 7.4% in April. This “flash estimate” will show Tuesday.

This will make it clear that the European Central Bank should normalize policy, as they meet on June 9th.

The markets and economists anticipate a 25-bps rise in July. However, a strong inflation print might fuel discussion of a more substantial move. Officials at the ECB are pushing for a much larger increase.

In response to inflationary pressures they hadn’t anticipated, the United States, Canada, New Zealand and Australia have decided for higher 50bps rate increases. With inflation at 2%, the ECB is not yet ready to start its hike cycle.

Graphic: Euro zone inflation well above its 2% target – https://fingfx.thomsonreuters.com/gfx/mkt/zdpxowadmvx/inflation2505.PNG

4/ SELL IN MAI? KIND

The sell-in-May-and-go-away adage applies to equities and yes, investors dumped stocks, especially those listed on the tech-heavy Nasdaq.

Softer data has brought back buyers to bonds so that equities rebound. In May, yields on the Bloomberg-Barclays global index fell more than 10 basis points.

There is still no indication of any relief in monetary policy, as Australia, New Zealand and the United States all increased rates in May to combat inflation.

More of the same will be happening in June – an additional 50-bps rate increase in Canada and the United States and likely a quarter-point Bank of England action. The ECB (and Switzerland) should make plans for tightening policy.

Pay attention to what rate-setters say. Some believe that the Fed might signal a temporary halt if data is worsening. It is possible to sell your May stock and buy June’s.

Graphic: World stocks end a volatile May – https://fingfx.thomsonreuters.com/gfx/mkt/movanzdldpa/stx2605.PNG

5/PEAK DOLLAR

Dollar rallies have reversed after soaring to highs of two decades ago. The dollar has lost 3% against other currencies, while the euro rose to an all-time high of one month. Investors worry that the U.S. may not be as resistant to downturns than they believed, if interest rates rise.

Christine Lagarde, the ECB’s boss, just indicated that a halt to negative interest rates was imminent – indicating that rate-hikers are also joining the tightening bandwagon. Although investors may not be ready to label a dollar top, another fall in financial markets could lead to it being bid up again as a safe-haven. But most people will monitor the data closely to track how the U.S. economic situation.

Graphic: King dollar – https://fingfx.thomsonreuters.com/gfx/mkt/byprjdqgape/King%20dollar.JPG